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The past few years have seen the rapid expansion of the coal seam and shale gas industry. Combine this expansion with the recent introduction of a price on carbon here in Australia, and you end up with a bunch of intriguing questions.

What role will gas play in our future energy mix? Could gas be used as a stepping-stone to a clean-energy future? Or will we be seduced into a “half-clean” state from which escape could prove expensive?

In Australia, gas accounts for 18% of total power generation capacity and 11-14% of generated electricity. Unlike coal power stations, gas stations can be quickly ramped up and down, making gas valuable in trying to meet variable demand.

This flexibility overcomes the high price of gas when compared to coal – in Australia, wholesale gas prices are generally around $3-4 per gigajoule (GJ); coal is more like $1-2/GJ.

Australia has very significant reserves of gas. These have been growing with the emergence of new traditional gas fields – including those used for the Gorgon Project in Western Australia and those being mined in coal seam gas (CSG) developments in Queensland. This positive outlook has meant gas-fired power projects have combined with wind farms to dominate recent additions of new capacity.

Cleaner than coal?

Gas power emits less greenhouse gases than coal when burned – approximately 0.4 tonnes of CO₂ per megawatt hour (t/MWh) of electricity, versus 0.9t/MWh for black coal and 1.2t/MWh for brown coal.

Given these quantities, the recent introduction of a price on GHG emissions – $23 per tonne initially – will favour gas ahead of black and brown coal. This will add approximately $9/MWh to gas-fired power, compared with $18 for black coal and $28 for brown coal.

But the world is more complicated than that. For at least several years, demand from export markets will add more to the cost of our black coal and gas than the carbon tax will. After many decades of domestic east-coast prices being largely insulated from international forces, gas prices are moving towards export parity (the price the supplier could get on the export market).

The CSG explosion

The balance of global demand and supply for gas from non-traditional sources – such as CSG and shale – will be the largest influence on Australia’s domestic prices. Export prices for black coal have also been strong and will progressively flow through to domestic markets, pushing local prices up. Recent decisions like that of the New South Wales Government to effectively subsidise domestic coal prices can cushion such movements in the short term.

The nett result will therefore be in favour of brown coal power for a number of years, given there is little demand for brown coal overseas (it is very difficult to transport), and brown coal generators are commercially tied to their coal sources.

Fuel switching between existing coal and gas plants is possible. But given rising Australian gas prices, building new gas plants may still be challenging. To go further and shut down existing coal plants in favour of new gas plants will require a substantially higher emissions price – making gas considerably more attractive – than is envisaged in the first few years of the emissions trading scheme.

This could lead to Australian being locked-in to an asset mix from which it could be difficult (and expensive) to extract ourselves. This could then hinder our efforts to achieve decarbonisation of electricity by mid-century.

Such projections seem very optimistic given CCS is not in commercial operation anywhere in Australia. Estimates of the emissions price necessary to make CCS viable range from more than $100 per tonne of CO₂ to as low as $20 per tonne.

In the short term, gas is competitive with fossil fuels. A rising carbon price means gas will out-compete coal and begin competing with renewables. Gas will compete with renewable energy quite strongly for some time, but the application of other policies – including the renewable energy target and feed-in tariffs – tend to mean that, in projections, gas is displaced by wind and solar respectively.

The nett result of these influences on gas for power generation shows up in a wide range of scenarios and projections, including those from the Australian Energy Market Operator (AEMO). Near-term projections are generally positive for gas, while projections beyond ten years or so begin to diverge sharply, depending on assumptions regarding the above factors.

Australia is blessed (or cursed?) with a bounty of energy choices. In the short term, the tide of change would seem to be flowing in favour of gas. In combination with wind and solar developments, gas can contribute strongly to the achievement of near-term climate change objectives.

However, this achievement may come at a higher price than many will find acceptable, and the environmental challenges are likely to become greater. Under most circumstances, gas looks to be a good bet, but whether today’s white knight becomes tomorrow’s evil prince is the more intriguing play.